Group Project

Report ON
Ratio Analysis of Coca-Cola & Valuation of Square
Pharmaceuticals

Course Title: Financial Statement Analysis (FIN410)

Section- 5

Submitted to:

Mr. Taskin Shakib (TKS)

Lecturer, Department of Finance & Accounting, NSU

Submitted By:
Name ID
Samiha Mizan 1812163030
Shadman Shakib 1712018630
Nahida Akter Jannat 1712024630
Md. Abrar Bin Hasan 1620550030
Shuvo 1521598630

Date of submission: 9th October, 2020

 Letter of transmittal

9th October, 2020

Mr. Taskin Sakib

Department of Finance and Accounting

School of Business and Economics

North South University.

Subject: Report on ratio analysis of Coca-Cola and valuation of Square

Pharmaceuticals

Dear Sir,

Firstly, we would like to thank you for giving us the opportunity to prove our
learnings through this project on the Ratio Analysis of Coca-Cola and Valution of
Square Pharmaceuticals.

In accordance to the guidelines and instructions that you have provided and the
knowledge we have gained through your class lectures we have prepared this
report.

We hope this report will meet your requirements.

Sincerely yours,

Samiha Mizan

Shadman Shakib

Nahida Akter Jannat

Md. Abrar Bin Hasan

Shuvo
 Table of Contents

Introduction...........................................................................1
Ratio Analysis of Coca-Cola.................................................2
Liquidity Ratios...............................................................................................2
Asset Management Ratios...............................................................................3
Profitability Ratios..........................................................................................7
Debt Management Ratio...............................................................................10
Market Ratio..................................................................................................11
Operating Leverage.......................................................................................12
Valutaion of Square Pharmaceuticals Ltd........................14
Pro-forma Income Statement.......................................................................14
Pro-forma Balance Sheet..............................................................................16
Calculation and Interpretation of Beta.......................................................17
WACC............................................................................................................17
Valuation Scenario........................................................................................18
Appendix..............................................................................20
 Introduction
This report is divided into two parts concerning two companies, one which is international
and the other is a local Bangladeshi company. The first part of the report strives to give us a
detailed idea about the liquidity, profitability, asset management, debt management and
market position of the assigned International Company, The Coca-Cola. The Coca-Cola
Company is an American Corporation founded in 1892 and is primarily operating for the
manufacturing and sale of syrup and concentrate for the Coca-Cola beverage as of today. The
Coca-Cola is not only an American favorite but the number one name for sweetened
carbonated beverage worldwide. The company is the largest beverage manufacturer and
distributor in the world and one of the largest corporations in the United States with its
headquarters in Atlanta, Georgia. We have conducted a financial statement analysis of The
Coca-Cola Company for three consecutive years (FY 2017, 2018, 2019) by taking help of
ratios. The ratios calculated give us an insight as to the performance of the company in the
given categories for a period of three years and also helps us observe the changes and patterns
of such changes that took place.

The second part of the report involves the valuation of the assigned local company “Square
Pharmaceuticals”. Square Pharmaceuticals Limited is the largest pharmaceutical company in
Bangladesh and has secured the first position among all national and multinational companies
since 1985. Since its inception in 1958, it has been able to mark its name as one of the most
successful pharmaceutical company of the country. The company was converted into a public
limited company in 1991 and listed with stock exchanges in 1995. It has been a pioneer in
exports of medicines from the country in 1987 and has not stopped ever since with its
massive exports of antibiotics and other pharmaceutical products. Moreover, recent financial
statistics states that the turnover of Square Pharma was BDT 50.87 Billion with about 16.95%
market share having a growth rate of about 10.85% in the period July 2018- June 2019.
Therefore with the aid of the numerous forecasting techniques we learnt in class, we have
calculated forecasted future cash flows for 5 years and also conducted several other
calculations that helped us value the Square Pharmaceuticals.

1
 Ratio Analysis of Coca-Cola
Liquidity Ratios

Current Ratio

1.34

1.05

0.76

2017 2018 2019

The graph shows that in 2017 the company had 1.34 dollar of current assets for every dollar
of current liabilities. Over the years, the current ratio had decreased significantly, which
probably is not a good sign. In 2019, as we can see, the company didn't have enough current
assets against its current liabilities. The trend is negative here, which means they are probably
taking too much debt or their cash balance is depleting. In either case, it can create a solvency
issue. Also, the declining rate has increased over the years, which may indicate increased
operational risk and can negatively impact the company's value.

2
 Quick Ratio

0.42

0.39

0.36

2017 2018 2019

In 2017, the Coca-Cola Company's quick ratio was 0.36, and over the years, this ratio had
fluctuated. Also, this ratio had been less than 1 in all the years. It indicates that the company
doesn't have sufficient against its short-term liabilities without selling inventories.

Cash Ratio

0.31

0.24
0.22

2017 2018 2019

The graph shows that Coca- cola's cash ratio was meager and had fluctuated over the years.
In 2017 the cash ratio was 0.22, which slightly increased in 2018, but again decreased in
2019. By looking at the number and trend, we can see that company doesn't have enough
cash in its bank to pay off its short-term liabilities.

Overall, Coca-cola Company's liquidity position has been worsening over the past three
years. It may be an indication that the company is not managing its working capital
effectively.

3
 Asset Management Ratios

Inventory Turnover Ratio refers to how many times the inventories are replenished during the
year. It can be calculated by taking Cost of Goods Sold and dividing by Inventory. In general,
higher the inventory turnover, the better, since high inventory turnover typically means that
goods are being sold quickly and there is considerable demand for their products. Low
inventory turnover, on the other hand, would likely indicate weaker sales and declining
demand for a company's products. In the ratio analysis conducted for Coca-Cola we can see
that the inventory turnover was the highest in 2017 at 4.99, during this year they had higher
sales and considerably lower inventory amount. This means in 2017, they were able to
replenish their inventory more, which means there was more sales. However the turnover
ratio fell to 4.26 in 2018, mostly due to their fall in cost of goods sold. During 2018 their
inventory count also increased slightly from that of 2017. In the consequent year of 2019, the
turnover ratio improved and increased to 4.33 and this was mostly because of its hike in cost
of goods sold which indicates that sales improved in 2019 even though inventory increased
which is why the turnover ratio is comparatively better off than in 2018.

4
The asset turnover ratio is a comparison of sales to total assets. This ratio provides us with an
indication on how efficiently the assets are being utilized to generate sales. The total asset
turnover analysis of Coca-cola over the years shows us that the turnover was at 0.403 in
2017, which means for every $1 of assets $0.403 was generated in sales. However in the
consequent year of 2018, the turnover ratio dropped to 0.383 indicating a considerable fall in
its total sales and there was a decrease in the total assets amount as well. This means in 2018
the company was able to generate lesser amount of sales by utilizing its assets compared to
2017. In the following year of 2019, however the turnover ratio greatly improved and stood at
0.431 which was mostly because of increase in their total sales as well as increase in the total
assets amount. Thus, over the years from 2017 to 2019 their asset utilization improved even
though there was a decline in 2018 but they efficiently managed to overcome that downside.

Average Collecti on Period

38.6
38.38 38.36
38.4
38.2
38
37.8
37.6
37.4 37.29
37.2
37
36.8
36.6
2017 2018 2019

5
The Average collection period gives us an idea as to how long it takes for a company to
collect the payments for sales made on credit. Since information about the credit sales of
Coca-cola is not given in the financial statements, we assumed that 100% of Coca-cola’s
sales is credit sales and then went on to calculate our receivables turnover, which then aided
us to calculate the collection period. We can see from the analysis that in 2017, the company
was favorably at a good position at collecting its receivables since it stood at 37.29 a much
lower rate than other years. However in the following years of 2018 and 2019 the collection
period increased to almost 38.4 days which shows that the company was not able to get in
cash into the company by collecting its receivables as fast as it could in 2017. This shows that
the company has been performing a bit less favorably in terms of cash collection over the
years.

Average Payment Period

260
255
255 253

250
245
240
235
230 225.86
225
220
215
210
2017 2018 2019

Average payment period represent the average number of days a company takes to make the
payment to its suppliers. Generally, the higher the payable days the better it is for a company
from the point of liquidity since the cash can be retained inside the company for a longer
period of time before having to make the payments. For the analysis of Coca-cola we can see
that in 2017, the company maintained a rather low payment period of almost 226 days, which
means they had to pay back their creditors within 225 days. However in 2018, the payment
period increased to 255 days, which indicates that the company could keep the cash withing
itself for longer period of time before making the payments so had greater liquidity compared
to that of 2017. In 2019, the payment period had a slight drop to 253 but still maintained a
higher number of days to make payments than in 2017 which indicates a better liquidity

6
position than that of 2017, however a slightly less favorable position compared to that of
2018.

Profitability Ratios

Gross Profit Margin

Gross Profit Margin

63% 63%

61%

2017 2018 2019

According to the data, Coca cola’s GPM in 2019 decreased the by 2%. There was no change
in 2017 and 2018. The present value in 2019 of 61% suggests that it is currently generating
61% gross profit on sales. The decreasing trend indicates that its ability to pay off the costs
of production has decreased during this time. However, the GPM is higher than the current
industry average of 30%, so even though they had a small decline, still they are in the better
position in terms of industry.

Operati ng Profi t Margin

35%
30%
25%
20%
15% 29% 31%

10% 21%

5%
0%
2017 2018 2019

7
According to the data, Coca cola has had an increasing OPM, with a total increase of 10%,
Increasing OPM means its ability to generate enough sales to pay off both the cost of
production and operating expenses is increasing as well. However, even after the increase, it
has an OPM of 31% in 2019 which is higher than the industrial average of 23%. Therefore,
the ability to pay off the expenses has increased, keeping the operating expenses under
check.

Net profit margin

24%
25%
20%
20%
15%
10%
4%
5%
0%
2017 2018 2019

Net profit margin

According to data, Coca cola’s Net income increased drastically over three periods of time
from 2017 to 2019, a total increase of 20%. There was 4% increase in 2019 from 2018 where
it was not much but was significantly higher than 2017. This means in 2017 the company
had lower revenue or higher expense. But following years increasing trend concludes that
they became able to cut cost from operating activities which resulted in higher Net profit
margin.

Return on Asset
10%
10%
9%
8% 7%
7% 6%
6%
5%
4%
3%
2%
1%
0%
2017 2018 2019

The increase in the net income of Coca cola has had a direct effect on its ROA as well, as the
data shows it’s on the increase. The overall increase is about 4% from 2017 to 2019 resulting

8
in 10% in 2019, according to the given data. This is promising for the company as the
increasing ROA clearly suggests the assets are utilized and contributing to the overall net
income. Although the present value of 10% is below the industry average of 13% but
increasing trend is showing promising future output for coca cola.

Return on Equity
50%
40%
30%
47%
20%
34%
10%
0% 5%
2017 2018 2019

Return on Equity

Just as the increasing net income had a direct effect on the ROA, it directly affects the ROE
as well. As usual, Coca cola’s ROE is on the increase as well, with an approximate total
increase of 41%, which is very high for the company. The increasing ROE suggests that the
return shareholders are getting from their investment is on the increase, which means the
company has been able to maximize their shareholders’ wealth during the time period.
Moreover, the current ROE of 47% is far greater than the industry average of 21%. All these
are very good signs for the company as shareholders would stick with coca cola on them in
the long run.

Earnings Per Share

1.4 1.27
1.2
1 0.91
0.8
0.6
0.4
0.18
0.2
0
2017 2018 2019

Earning Per Share

9
Earnings allocated USD 0.177 per share for their stockholders in 2017. EPS increased
drastically in the following years. In the year 2018, Coca cola’s EPS was 0.014 per share and
in 2019 it was the highest EPS of USD 1.27 for coca cola within the time period 2017 to
2019.

Debt Management Ratio

Debt Ratio
78.41%

77.10%

75.58%

2017 2018 2019

Normally, debt ratio defined as total debt to total asset. Above chart is representing The
Coca-Cola Company’s debt ratio. Moreover, the debt ratio is clearly indicating that how
much asset of Coca-Cola have been financed by debt over these three fiscal years. We know
that, if a company became more leveraged than it is not so good for the company. In 2017
Coca-Cola debt ratio of 78.41%. Which was much higher. From the graph, we can also say
that the company tries to reduce their debt on the upcoming years (2018 & 2019). It is
representing that Coca-Cola might had tried to reduce their Debt by giving the money of
creditors on 2018 and 2019 or total assets of Coca-Cola might have increased in these years.
Still as Coca-Cola is a beverage Company and this company manufacture drinks, so around
76% Debt ratio is higher for Coca-Cola to attract the market investors who usually focused
on company value.

10
 Time Interest Earned Ratio
12.4
9.02

10.09

2017 2018 2019

Times interest earned ratios helps a company to find out the capability to meet its debt
obligation based on companies current income or income before tax. In other word this ratio
is more powerful that it can show the company how many times a company can pay its
interest charges. An interesting thing should be noticeable which is from the debt ratio we
noticed that the ratio have been decreased over time which is mediocrely good. That
reflection we can also see in the TIE ratio also. In this ratio, we are seeing the opposite
reaction when the debt is paying by the Coca-Cola. The TIE is increasing with the sequence
of the payment of debt. From 2017, in 2018 the ratio increased in a steady way. In 2019, it
increased by almost two times. That means Coca-Cola has gained enough cash after paying
its debts to continue to invest in the business.

Market Ratio

Price/Earnings Ratio
158.21

31.36 26.48

2017 2018 2019

P/E ratio is one of the most fundamental ratio, which investors see before investing in the
company. Investor’s analyses how much they have to give based on the company’s current
earnings. In 2017, the P/E ratio of Coca-Cola was astonishingly so high. That means may be
the company was so much overvalued. Moreover, the investors may predicted the high

11
growth of Coca-Cola in the future. The investors who predicted that fact can be value
investors. That is why they wanted to put 158.21 to earn 1 dollar in return approx. In 2018
and 2019, the ratio falls sharply. That may generate two interpretations. May be the company
is now under valued or the value investors forecasting was so perfect that that P/E ratio falls
down because of the growth of Coca-Cola. That means in 2018 and 2019 Coca-Cola did
really well and satisfied their investors.

Market -Book Ratio

11.23

10.59

10.29

2017 2018 2019

The investors to find out their potential investment also use this ratio. As we can see
throughout these three years the ratio have been increased. Which indicated that the company
can be a good investment for some the investors. Additionally, from the above chart we also
say that the investors are paying around 10.29 to 11.23 USD in 2017-2019 for company’s 1-
dollar net asset. This is fine actually. However, if it increases more then it could be the great
trouble for value investors. If some day Coca-Cola becomes liquidate then investors will get
1 dollar return for their 11.23 (2019) investment. Therefore, increasing of this ratio may fall
the investors in risk also.

12
 Operating Leverage

Operating Leverage

0.45

2017 2018 2019

-0.37

-0.6

In 2017 and 2018 the company had negative operating leverage, which means the company's
fixed cost had a greater portion in the company's total cost structure, and there was a decrease
in sales. It indicates their fixed cost was higher than the contribution margin, so the company
was in a net loss position. But the ratio improved in 2019 and had positive operating leverage.
It means the company's sales had increased without increasing fixed cost, which in turn
reduced their overall expenses, resulting in increased net profit.

13
 Valutaion of Square Pharmaceuticals Ltd.
Pro-forma Income Statement
We have calculated pro-forma income statement of square pharma for next 5 financial years
which is 2020-2024 based on 2019 financial data.

14
We have taken 2019 as the base year for calculating the Sustainable Growth Rate of Square
Pharma. As SGR promotes the square can have extra loan under the optimum capacity of the
company. That is why we promoted SGR because Square’s equity was so high and they

15
utilized their equity more to generate assets and sales growth in previous years (2017, 2018,
and 2019). For SGR calculation, we had to calculate the ROE of the base year. After that, we
also had to calculate the retention rate of Square 2019. The results came 13% approx. For
forecasting, we use this constant rate to of 13% in year (2020 to 2024). We did not increase
the tax side in I/S and also in liability side only increased the A/P by using SGR. Rather than
this we have increased all the assets and all the I/S items through that constant rate. At last,
we find out in forecasting that extra financing needed from 2020 to 2024 is in growth model.
Every year that financing increased. As we are using SGR so, this fact is logical absolutely.

Pro-forma Balance Sheet

Here we have shown the pro-forma balance sheet of Square Pharma and almost all the
account of total asset will change because of the changes in the growth rate of the company.

16
 Calculation and Interpretation of Beta
Company Beta

17
 Square Pharmaceuticals Ltd. 0.56399

Square Pharma’s beta is 0.56 which means its stock is 44% less volatile than the market
changes.

We have calculated the beta by using slope and through regression alnalysis which has
showed in the excel file.

WACC

From last year 2019 income statements, current debt and long term liabilities are obtained
which is in total BDT of 4265 million. The total equity is 65669 million. Weight of debt and
equity of the company is 91.02% and 5.91% respectively.

Using CAPM model, the cost of equity is 8.45%. Here, cost of equity is calculated using the
market return and risk free rate which is 10.59% and 5.69% respectively. The cost of debt is

18
1.73%, it is calculated adjusting tax, and tax rate is 25.16% which we obtained from the
financial report of Square Ltd.

Thus the Weighted Average Cost of Capital (WACC) is 7.80% which is calculated using the
above formula. This means Square spends 7.80% on an average for its financial resources.

Valuation Scenario
Year 2020 2021 2022 2023 2024
EBIT 15,119 17,085 19,306 21,816 24,652
Dep Exp 2,292 2,590 2,926 3,307 3,736
Tax 3,940 3,940 3,940 3,940 3,940
OCF 13,471 15,734 18,292 21,182 24,448

Year 2020 2021 2022 2023 2024

Ending Fixed asset 38,119 43,075 48,675 55,002 62,153
Begging Fixed Asset 33,734 38,119 43,075 48,675 55,002
Depreciation 2,092 2,364 2,671 3,018 3,410
NCS 6,477 7,319 8,271 9,346 10,561

Year 2020 2021 2022 2023 2024

Ending NWC 40,340 45,878 52,135 59,206 67,196
Beginnig NWC 35,441 40,340 45,878 52,135 59,206
Change in NWC 4,899 5,537 6,257 7,071 7,990

Year 2020 2021 2022 2023 2024

OCF 13,471 15,734 18,292 21,182 24,448
NCS 6,477 7,319 8,271 9,346 10,561
Change in NWC 4,899 5,537 6,257 7,071 7,990
FCF 2,095 2,878 3,764 4,766 5,898

19
Investment Decision:

From the calculation we can see that Square’s stock is slightly overvalued as its intrinsic
value is very close to the current market price. Though stock is overvalued, the investors who
has stock will not be benifitted much by selling the stock now as difference is very
insignificant. They can hold the share for now as from pro-forma statement we can see that
sales might increase which might further increase the stock price. Again, the investor who
wants to buy the stock won’t be affected much as stock is slightly overvalued. The can buy
the share now as stock price is expected to increase more. Also, we can say that Square’s
current market current price is not manipulated by the market as its intrinsic value is very
close to the market price. In addition to that their sales is expected to grow more which will
increase the Square Pharma’s potential, will lead to the increase in stock price.

Appendix
Income Statement of Coca-Cola

20
Balance Sheet and Cash Flow Statement of Coca-Cola

21
22
Income Statement of Square Pharmaceuticals

23
Balance Sheet of Square Pharmaceuticals

24
25
Cash Flow Statement of Square Pharmaceuticals

26
Calculations ( Coca-Coal Company)

27
28
29